Raytheon Wins $523M AMRAAM Modification Deal From Air Force

Raytheon Company’s (NYSE:RTN) Missile Systems business segment recently won a modification contract for production of Advanced Medium Range Air to Air Missile’s (AMRAAM) 31^st Lot. Work related to the deal is scheduled to be over by Jan 31, 2021.

Details of the Deal

Valued at $523.1 million, the contract was awarded by the Air Force Life Cycle Management Center, Air Dominance Contracting Office, Eglin Air Force Base, Florida. The modification also provides for the production of AMRAAM’s 32^nd Lot and other AMRAAM systems items.

Raytheon will execute the task for this deal at Tucson, AZ. Per the terms, the agreement involves foreign military sales (“FMS”) to Japan, Kuwait, Poland, Indonesia, Qatar, Germany, Australia and the United Kingdom. FMS funds will be primarily utilized to finance the contract, while fiscal 2018 production as well as research and development funds will finance a smaller portion of the deal.

A Brief Note on AMRAAM

Raytheon’s AMRAAM is the world's most sophisticated air dominance weapon, with operational flexibility during air-to-air and surface-launch engagements. Its capabilities have been fully demonstrated in more than 4,200 test shots and 10 air-to-air combat victories.

Per Raytheon, in the air-to-air role, no other missile compares to the AMRAAM missile. The weapon's advanced active guidance section provides aircrew with a high degree of combat flexibility and lethality. This weapon has been procured by as many as 37 nations, including the United States. It has been installed in top-quality military jets like F-16, F-15, F/A-18, F-22, Typhoon, Gripen, Tornado and Harrier.

Its latest version, the AMRAAM-Extended Range missile is a new, ground-launched solution that will intercept targets at longer distances and higher altitudes.

Our View

With an increase in cyber-attacks, terror threats and geopolitical instability, a rapid rise in defense spending has been witnessed among countries to strengthen their national security worldwide. As a result, America has been observing a solid inflow of military contracts lately, particularly for missile-defense, in the wake of the consistent cross-border tensions that prevailed in 2017 between the United States and North Korea.

With Raytheon being one of the defense majors in the United States, Raytheon’s Missile Systems segment has been clinching significant awards from the United States as well as international customers, courtesy of its high-end, combat-proven advanced arsenal. For instance, the company won a $2.3-billionhybrid contract for providing engineering services to the Phased Array Tracking Radar Intercept on Target (PATRIOT) weapon systems program, at the end of January 2018.

Based on the 15% sales growth at Missile Systems in fourth-quarter 2017 and the growing demand for Raytheon’s Integrated Air and Missile Defense portfolio in domestic as well as international markets, we expect this unit to scale new highs post winning contracts like the latest one. Moreover, the recently released fiscal 2019 defense budget aims at spending $12.9 billion for enhancements of U.S. missile defense capabilities, of which $12.9 billion is allocated for missile defense. Notably, the budget includes an investment plan of $1.1 billion for 240 Patriot Missile Segment Enhancements. This in turn reflects higher growth prospects for Raytheon and we expect the company to win more such contracts from the Pentagon in the coming days.

Price Performance

Shares of Raytheon have rallied about 42% in a year, compared with the broader industry’s gain of 35.4%. The company’s growing demand for missile defense systems and expanding overseas business boosted the performance.

Zacks Rank & Stocks to Consider

Raytheon carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the same space are Curtiss-Wright Corporation (NYSE:CW) , Transdigm Group (NYSE:TDG) and Hexcel Corporation (NYSE:HXL) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Curtiss-Wright Corp. posted an average positive earnings surprise of 15.03% for the past four quarters. The Zacks Consensus Estimate for 2018 earnings rose by 10.1% over the last 60 days.

Transdigm Group has an average positive earnings surprise of 0.92% for the last four quarters. The Zacks Consensus Estimate for 2018 earnings rose by 29.6% in the past 60 days.

Hexcel Corp. boasts a solid long-term earnings growth rate of 8.4%. The Zacks Consensus Estimate for 2018 earnings has risen by 1.4% in the past 60 days.

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